978-1118873731 Word Chapter 32 Solutions

subject Type Homework Help
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subject Authors David Wessels, Marc Goedhart, McKinsey & Company Inc. Tim Koller

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Valuation: Measuring and Managing the Value of Companies, Sixth Edition
Chapter 32 High-Growth Companies
Solutions
1. The DCF method is preferred, and the basic inputs are the same for a high-growth company as for an
2. For the mature division, the analysis begins with historical performance and then forecasts forward,
as detailed in prior chapters. For the high-growth division, however, the first focus is on expected
3. The total market includes all possible clients that could possibly have use for the product or service.
For a firm like Yelp that offers local reviews, the total market consists of all businesses in the
4. Estimating market share requires a number of inputs such as the size of the market, the level of
competition from similar products already being marketed, and the degree to which the new firm
5. Estimating potential margin requires a triangulation between internal cost projections and operating
margins for established players. The estimation process for capital turnover would use an estimate
6. Most young, high-growth firms have negative earnings because many investments are intangible
7. The stock did not have to be mispriced. The comparatively low price a year earlier could have been
from a combination of (1) an expected present value of cash flows that was lower than the current
present value and (2) a higher level of uncertainty. For example, if a company has a 50-50 chance of
earning either a $6 per year cash flow per share or a $0 per year cash flow per share in perpetuity
beginning in a year, the expected cash flow is $3 per year. If the current discount rate is 15 percent,
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then the price per share would be $20 per share. If, in one year, the $6 per share cash flow is

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